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The Social Responsibility of Business is to Increase its Profits
- Outline of Milton Friedman’s Perspective
Milton Friedman was one of the prized economists in the current generation, and although he left the world last 2006, that cannot really change his work and his legacy. One of Friedman’s most controversial legacies was his perspective about capitalism, particularly the value motive that businesses have, and why their profit-seeking behaviors must be tolerated and deemed acceptable by society. Friedman argued that the social responsibility of businesses is to increase its profits. Now, it would be wrong to simply follow Friedman’s advice at face value, because he did not simply come up with this idea without spending a lot of years studying economic concepts and principles. One thing that the author of this paper wants to set for the record is that within the grand scheme of things, Friedman’s ideas were more capitalist than socialist. The same can of course be said of himself—that he supported capitalism more than he did socialism during his time.
By saying that the social responsibility of businesses is to increase its profits, Friedman was basically attempting to provide a global template that politicians, policymakers, and people working for the government around the world could follow. One of the dilemmas that people working for the government face is finding a coherent and emphatic solution to the ever unsolvable problem that is governance. In order to govern effectively, one must know the fullest extent of their responsibilities and accountabilities to the people, or in the case of governments, the societies that they serve. Friedman was basically offering a one size fits all type of solution to the unique problem that people working in the government has—by saying that the only social responsibility of businesses is to increase their profits. This would indeed be an attractive proposition because many people working in public service have been left dumbfounded by this exact problem. Discovering that someone could come up with a solution quite easily (i.e. Milton Friedman) would indeed be surprising. Many people have fallen victim to the sickness of blindly following Friedman’s teachings without ever knowing how he came up with them in the first place, and more importantly, what type of problem he was trying to solve.
Friedman was all after solving the puzzle that would lead to the integration of three concepts that for him was important for a well and fully functioning society. Those three concepts were freedom, democracy, and capitalism. Friedman argued that businesses play an important role in the process of upholding freedom, democracy, and capitalism, which is why they have occupied a large portion of many of his pieces. There is one provision to the profit motive clause that Friedman indeed phrased. In verbatim, Friedman stated that “there is one and only one social responsibility of business—to use its resources to engage in activities designed to increase its profits, so long as it stays within the rules of the game which is to say, engages in open and free competition, without deception and fraud” (Friedman 1).
Many have used Friedman’s arguments, at least the first part of it, particularly the profit motive, as a justification to commit activities that can be perceived as borderline illegal, and in some cases, even atrocious. There is no shortage of supply of stories coming from both the mainstream and alternative media of unscrupulous businesses getting away with their illegal activities, all for the sake of profits. It was also surprising to discover that a significant number of businesses that belong to the Fortune 500 Companies that everyone has admired and respected are involved in some kind of illegal and or unethical activity, one way or the other, and that the government is letting get away with said activities. This is a perfect example of the application of Friedman’s arguments in the field.
Friedman was after defining a clear boundary in terms of economic freedom for businesses. For the record, Friedman also discussed how he thought the boundaries in terms of economic freedom for other agents of the economy such as the government and the consumers should look like. Friedman, being the economist that he was, had the goal of creating a perfect balance between the interests, freedom, and responsibilities of the different economic agents, because he argued that that was the only way for a well and fully functioning system, not necessarily a capitalist and democratic one, can be created and maintained.
For Friedman, giving every agent of the economy a specific formula or template to follow, was instrumental to the creation of a utopian capitalist democratic system. Assuming, for example, that a certain country’s government has applied the principles Friedman has pushed forward in his work (about the social responsibility of businesses), it would be safe to suggest that a lot of businesses would take advantage of the loopholes. This is why it is always important to interpret Friedman’s work correctly, and not misconstrue it, because any legislation based on the misconstrued version of his arguments, would definitely not lead to the stimulation of the desired effects on the economy or any social system for that matter.
- Critical Analysis of Milton Friedman’s Perspective
The author of this paper’s goal for this section was to present a critical analysis of Milton Friedman’s perspective about the social responsibility of businesses in an unbiased manner. The only way to accomplish that, especially the part where it says it has to be unbiased, is to present both the positive and negative aspects of his perspective. It is important to note that the complete version of the profit motive of businesses is what is going to be used in the critical analysis. For the record, Friedman said that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.
It is easy to misinterpret and misrepresent Friedman’s perspective about the social responsibility of businesses by just focusing on the first half of what he said about it—that there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits. The second half of what Friedman said about the social responsibility of businesses is basically field with caveats and qualifiers. Unfortunately, many governments and businesses use this incomplete version of Friedman’s perspective to justify their actions towards the consumers.
Focusing on the positive side first, Friedman’s perspective about the social responsibility of businesses, allows for-profit organizations to focus on profits, and non-profit organization to focus on whatever advocacy they may be trying to support. The truth is that governments and from a broader perspective, the society, need businesses that can operate in the highest possible levels of efficiency. Many agencies and organizations that are funded by the government are already suffering from a lot of inefficiencies as they are. In many cases, it is the businesses in the private sector that are being looked upon to subsidize the losses brought about by the inefficiencies of the government. There is good reason to believe that society would crumble, as it would most not be able to afford, a scenario where both the government, and the businesses in the private sector, are suffering from insufficiencies. In a typical scenario, it is the businesses in the private sector who bear the responsibility of making up for the losses of the government or any other agency or organization it controls.
Friedman’s proposal about how governments should allow businesses to operate based on the profit motive allows for a higher level of specialization—among the different organizations that exist and operate in a socio-political-economic system, i.e. a country. One only has to look at the alternative in order to see the positive (potential) impact of Friedman’s suggestions. The alternative to Friedman’s profit motive is a scenario where even businesses in the private sector have to be saddled and or burdened with the responsibility to address social issues and other non-profit-related advocacies. It is a widely known fact that any programs that are meant to solve a social problem or any nonprofit-related concern is going to be expensive, and that not all businesses would be able to afford the hefty cost of participating in humanitarian and social responsibility programs that many liberals and socialist-leaning policymakers are trying to push forward. This alternative—where even private for-profit businesses are being required to dabble in the affairs of nonprofit corporations, does not look good, nor does it look like it is going to work. Friedman suggested that for-profit entities, i.e. businesses, should be left to their own devices, when it comes to making profit, and that the same should be true for nonprofit entities. With businesses having the ability and the freedom to focus solely on profits (plus the caveats and qualifiers that Friedman provided in the second half of his statement about the social responsibility of business), and with nonprofit entities being able to focus on their respective advocacy programs, each group gets a role to play in this complex world that we live in. This has so far been the model that has proven to be effective in creating a well and fully functioning social system.
Focusing on the negative side, Friedman’s idea about the social responsibility of businesses is not perfect. First, it basically opens the gate for greed and other unwanted virtues to prevail. A greedy business that wants to maximize profits, either for itself or for its shareholders, may end up being pushed to partake in illegal activities, especially the ones that have long been associated with great profits, such as illegal drug dealing, human trafficking, and money laundering, among others. Second, Friedman’ perspective about the social responsibility of businesses failed to mention the boundaries that the businesses, even the ones that follow the rules and all the other provisions he made in the second part of his profit motive statement, should follow in the event that they have to choose between profits and the needs of the people. It would be safe to suggest that the default setting of most, if not all, businesses, even in those crucial scenarios, is to let their desire for profits supersede the needs of the people. Third, a system or society that is built upon the idea that businesses should only be concerned about profits would most likely lack the qualities and characteristics that make humans, humans; examples of such characteristics would include empathy, compassion, trust, and selflessness, among others.
- Use of a Business Example
A perfect business example of the implications of Friedman’s perspective about the social responsibility of businesses would be Enron. Enron started out as a noble, fast-growing corporation. During the latter part of its growth stages (in its relatively short lifespan), its appetite for profits increased. This is what compelled the company’s executives to come up with a plan to systematically cook their books, to make it appear to the public that they are earning a lot of profits, even though their income statements already looked bad. The idea was that they could eventually be solve the company’s financial problems, by making it look successful from the outside. Evidently, this approach did not work, because Enron eventually got caught, and it later on declared bankruptcy. This shows one of the greatest weaknesses of businesses, especially when they are given so much economic freedom to do what they want. Enron happened at a time when the regulation against auditing and the reporting of corporate financial statements were lax. Clearly, giving for-profit entities too much freedom to well, generate profits, did not end well.
Another business example would be the subprime mortgage and housing crisis that happened in the United States sometime between 2007 and 2009. This was a period when a large percentage of the banking and financial institution in the United States were handing out real estate mortgage loans to practically everyone who was asking for it, even the ones that the banking officers knew could not afford to cover the monthly mortgage payments. The bankers were clearly motivated by profit at that time. They knew that the more loans they get approved for their clients, the bigger their commissions were going to be, and that was true in most cases, as evidenced by the fact that many executives and high ranking officers of the biggest banks in the United States received hefty bonuses during the aforementioned period, despite the fact that a lot of people were losing their homes. Banking and financial institutions also participated in a large scale sales of junk-status investment products that were presented to the customers as Triple A status investment products. This was courtesy of the bankers’ deal with the ratings agencies to artificially stamp the junk-status products with Triple A ratings, to make them more appealing to customers. In the end, we all know it did not end well. Many banks and financial institutions eventually filed for bankruptcy. Examples of actual businesses who got involved in this scheme are Lehman Brothers, Citigroup, JP Morgan and Chase Corporation, and Wells Fargo, among others.
In conclusion, the author of this paper agree to Milton Friedman’s perspective about the social responsibility of businesses, but only up to a certain extent. The bottom line is that businesses should not be left to their own devices; they should not be given total freedom to generate profits, especially when it comes to sensitive industries and markets such as food, drugs, and healthcare. The key is to find a perfect balance between economic freedom and the protection of the public’s interests and needs.
Friedman, Milton. “The Social Responsibility of Business Is to Increase What Exactly.” Harvard Business Review (2012): Print. 1. Apr 2018.